PepsiCo : Conference Transcript

THOMSON REUTERS STREETEVENTS

EDITED TRANSCRIPT

PEP - PepsiCo Inc at Consumer Analyst Group of New York Conference

EVENT DATE/TIME: FEBRUARY 20, 2019 / 6:00PM GMT

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CORPORATE PARTICIPANTS

Hugh F. JohnstonPepsiCo, Inc. - Vice Chairman, Executive VP & CFORamon Luis LaguartaPepsiCo, Inc. - Chairman, President & CEO

CONFERENCE CALL PARTICIPANTS

Ali DibadjSanford C. Bernstein & Co., LLC., Research Division - SVP and Senior AnalystAndrea Faria TeixeiraJP Morgan Chase & Co, Research Division - MD

Brett Young CooperConsumer Edge Research, LLC - Senior Analyst of Beverages & Managing PartnerBryan Douglass SpillaneBofA Merrill Lynch, Research Division - MD of Equity Research

Judy Eunjoo HongGoldman Sachs Group Inc., Research Division - MD, Senior Analyst & Co-Head of the GIR Asian Professionals NetworkRobert Edward OttensteinEvercore ISI Institutional Equities, Research Division - Senior MD & Head of Global Beverages ResearchWilliam Bates ChappellSunTrust Robinson Humphrey, Inc., Research Division - MD

PRESENTATION

Bryan Douglass Spillane- BofA Merrill Lynch, Research Division - MD of Equity Research

So we're ready for next presentation from PepsiCo. So we're very excited to have PepsiCo back at CAGNY again this year. Joining us today for the first time as Chairman and CEO is Ramon Laguarta; along with Vice Chairman and CFO, Hugh Johnston; and VP of Investor Relations, Jamie Caulfield.

Ramon, I'll turn it over to you.

Ramon Luis Laguarta- PepsiCo, Inc. - Chairman, President & CEO

Right. Good afternoon, everybody. Do I sound okay? Good. Thanks. Thanks, Bryan, for your introduction, and thanks for hosting all of us, Hugh and Jamie, myself, today. It's a pleasure to be in this beautiful place. For a Mediterranean guy, to be in the sun is something invaluable. So thanks for taking me out of New York down to the sun, and thanks for this terrific event.

I must admit, for those of you who listen to the call on Friday, this might be a little bit repetitive. And you guys might be probably tired of this faster, stronger and better concept, but we will repeat it again. For those of you that were not on the call, hopefully this is a good use of your time as you think about the next chapter for PepsiCo.

Let me spend a couple of minutes on the process itself, how we got to this new chapter. Because it was a good process for the management team. It got us all together and it got us into a future vision that was very exciting for all of us. We spent -- about 30, 35 people, so it was not only the top of the pyramid, it was a group of senior leaders from the company, over 4 months, different sessions, talking about our performance historically and then trying to go after areas of dissatisfaction with our performance. But also trying to align ourselves, what inspires us, what really motivates us and what is the potential of our company? So the chapter you will see is the aligned input or output of those sessions, and really, a common purpose for what is the top management of the company overall.

There were 2 areas that, although we were quite happy with our historical performance, as you will see, there were 2 areas that we said were not really capturing the full potential of PepsiCo. And one was we're not gaining market share consistently across the world. We have a lot of good pockets of great performance, but we're not gaining share consistently. And second, we thought that the speed of transformation of our capabilities, our cost, was not fast enough. So those 2 were the 2 areas of dissatisfaction, and that's what we want to call ourselves in this mission of taking PepsiCo from being in a very good place to being in a great place.

And before I go into the detail, otherwise Jamie will kill me, please read the safe harbor statement, or you can find it in our -- in pepsico.com.

This chart summarizes the next chapter. So let me just spend a couple of minutes on this chart. The key idea is we think we can deliver a balanced, sustainable financial performance, and therefore, good value for all of you as investors in PepsiCo, by having a growth model that's based on an accelerated top line expansion with the right levels of reinvestment so that we can transform ourselves over time and sustain that performance.

And there are strategies around becoming faster, around becoming stronger, around becoming better that are distinct from the past. And I'm trying to summarize. And there are strategies around accelerated investments, so how we're going to be investing in the business; about becoming a much more centric -- consumer-centric company; the way we're organized; the way we think about our costs; the way we think about our investment in capabilities, with very intentional areas where we want to invest; and also the way we think about our purpose and how we integrate that into our strategy. So let me unpack all of this in a couple of minutes.

Before that, I think what differentiates us from many other companies is we start from a position of strength. We start from a very strong foundation. And this is not only because we play in very attractive categories that grow very fast. They are large. So if you think about our beverages category, it's almost $1 trillion globally and is growing almost at 4%. The same with micro snacks. Micro snacks is almost $800 million globally and growing even faster than beverages. So we compete in very strong categories, complementary, a lot of common occasions between our 2 categories. We have -- within those categories, we have very strong, leading brands. And we have a very good product portfolio, as I'll show you later, that helps us cover a lot of these spaces in those categories. And we can evolve the portfolio with our brands into new spaces that get generated with new consumer needs.

We have a strong geographical footprint. We have a lot of positions of strength in many countries around the world, both in developed and developing markets, from which we can accelerate our growth.

In terms of the capabilities. We have strong, relevant capabilities in top line growth, also in productivity, that we can scale across the globe.

And then we have, I think a differentiated culture that is centered around growth and a very [good] talent in many parts of the world. I think that will become a competitive advantage going forward.

With that, we've been delivering, I think good performance over the last few years. So if you think of from 2012 to today, we've been delivering almost a 4%, 3.8% top line growth. Although it's true that the last 2 years, we've been probably lagging a little bit behind what we think is the potential of the company. We've been expanding our core operating margins. We've been delivering 9% EPS year-after-year. And we have been increasing our ROIC, and obviously, returning dividends and share repurchases. So a pretty good financial performance, but as I said, 2 things that leave us dissatisfied is our marketplace performance; and it's the way we're transforming ourselves, the speed of transformation of our (inaudible) to remain competitive and within the marketplace.

So with that, let me go into the priorities that will set this next chapter of PepsiCo. The first one is about becoming faster. And this, of course, is the #1 priority for us, is accelerating, increasing the speed of growth of our top line. And with 2 things: becoming more consumer-centric in our innovation, the way we think about the different consumer spaces in our categories; but also taking a higher investment, higher-growth posture against the opportunities that we have in the marketplace.

So 3 things here. First, we're going to play our portfolio against all the different multiple vectors in our categories, I'll show you later; and then investing in both our large U.S. businesses and our international business for future expansion.

Before I go into the portfolio, there's a growth model that applies to both our snacks and our beverages category. It's been proven for us over many years. And all our commercial initiatives will be centered around this growth model. And this is a, what we call, the 4 key benefits that our consumers are looking for in our categories.

Number one is variety. And variety is very important in both snacks and beverages. Those are 2 [relative] to our categories. I mean, the majority of consumers, and you probably [yourself] yourself, snack several times a day, drink several times a day. And you guys choose different brands, bothin snacks and beverages, for different parts of the day. [Having] a repertoire of brands and products that cover multiple demand spaces, be it in the morning, at night, during the day, different satiation needs in the different occasions for snacks or different functionality in beverages, it is critical to really capture all the occasions.

The other important piece for us is ubiquity. Ubiquity means -- we're an impulse category, so the ability to be everywhere where you have the need for a snack or our beverages creates a lot of value for you as a consumer and for us as a manufacturer. So for us, investing in this capability of being everywhere is a must-do.

The third one is creating brands that obviously hook the consumer, creates higher loyalty, creates that emotional link with our products.

And the fourth one is value. And value in developing market is clearly about affordability and price points. In developed markets, it's also affordability, but it's more about what are the benefits that go with the product so that we have a full consumer experience.

So everything you will see in our business, and we'll talk in the future, is around giving the consumer those 4 key benefits on a consistent way and on an advantaged way.

Now our portfolios and how we think of our portfolios. You see, this is a -- I think a great portfolio. Broad. It covers all the spaces from indulgent to nutritious. It covers different price points. It covers individual consumptions, social consumption. The way we think about this portfolio, obviously, we will keep evolving the portfolio in all the different vectors. We want to maximize the coverage that we have, all the different occasions of micro snacks. But we think about the portfolio in a way that we want to make sure that our global brands, our core brands are funded, they are healthy, they keep being modernized, they stay relevant to the customer every other time. And then we add to those big, global brands; big, core brands, some smaller brands that will become bigger in the future but -- that will give us the growth, but clearly, without our core brands healthy and growing, the whole portfolio doesn't work.

As you think about snacks, obviously, the big idea for us is taking this [beautiful portfolio] around the world. I must [say] we're not there right now, and that is a huge opportunity per se. But the other idea is as you think consumers moving more towards convenience and on-the-go, we will try to expand ourselves into occasions that are closer to mini meals, very close to street foods in developing markets, and that will be a huge area of growth for us going forward.

You think about our beverage portfolio similarly. We have -- we cover indulgent occasions. We cover nutritious occasions. We cover [personal]. We cover hydration. We cover a lot of different locations. We have beautiful brands, and we have solutions for many different need states. As you think of ourselves in the future, we will be innovating across all the different spaces. Again, we want to make sure our core brands stay healthy, well-funded, they grow. And then we will obviously invest in new spaces that will define the category for the future.

Also, you should think of ourselves investing quite a lot in creating a beyond-the-bottle space, what we call beyond the bottle. I mean SodaStream is a great example of how we're thinking about new spaces of consumption that do not require a bottle and still allow the consumer to personalize their consumption, and we eliminate the need for a bottle and plastic and everything else. So that's from the portfolio point of view.

In terms of the geographical priorities. We want to -- we had -- in this meeting we had with our people, we saw that there were growth opportunities everywhere, and including our beautiful U.S. business. And so if you think about the way we want to invest, we want to fortify North America. North America is a huge part of our business. It's healthy. It's growing. We want to make sure that those businesses are well invested.

If we start with Frito, to me, is one of probably the best consumer companies in the world, very well run, excellent management, excellent brands, great infrastructure, but still huge opportunities. And I mentioned in the call on Friday, we're only 19% of micro snacks. You think micro snacks, we're only 19%. So there's 80% of occasions that we don't capture in -- with Frito-Lay in the U.S. You see channel opportunities, geographical opportunities. So we think this is a business that, well-funded, will capture much more growth. And obviously, we have huge return on investments on this business. So we plan to invest in our manufacturing capacity. We plan to invest in our brands. We plan to invest in our go-to-market and enable Frito-Lay to continue this journey and also accelerate their market share performance.

The same applies to NAB. NAB, we know we have been underperforming the market for the last couple of years. Our goal is to get the business back into growing with the market. We know we have the brands to do it. We will -- and we started last year repurposing some of our A&M against our [bigger brands], taking money away from our smaller brands so we have a more holistic growth model.

We are investing in go-to-market. We think that we have opportunities to get more [capillar], at the same time, improving the way we service our large customers. We want to make sure that we have a cost-competitive and very flexible supply chain and also that we have an organizational model that allows us to service big, global customers but also be very locally relevant. And that's the recent announcement you saw on NAB. We're trying to have an organization that is able to be a bit more flexible in its pricing, in its understanding of the local routing and local opportunities. And I think we will generate additional performance because of that.

Internationally, you think about snacks, this is a great opportunity for us globally. I mean we have strong positions in many markets, in developed markets, in a lot of the developing markets. We have a very clear playbook on how to develop the category, how to build per caps of our business and how to build strong market positions, both with our potato chips, but some with our other products. So we will replicate the models that we have in Mexico, we have in Turkey, we have in Russia, we have in many markets around the world. We're going to try to replicate them globally. And obviously, the big dream for developed markets is to have the portfolio that I just showed you for Frito-Lay in all the developed markets. So if you go to Australia, you go to Western Europe, that would be our dream, to have that portfolio in those markets. And it's only a question of execution and discipline on the execution.

When you go to beverages, there we have different market positions in different parts of the world. We're going to have a much more nuanced approach to beverages, investing more where we have the right to succeed, where we are leaders or we have strong battleground positions; and then being more smart about where we invest, how do we invest when we have a smaller market share. So again, I think I covered this, where we're going to make investment. We're going to make investments in manufacturing capacity, digitizing the business, supply chain, go-to-market and A&M. Yes.

The second pillar of our strategy, and to me, is most important, is how do we become stronger? And the word stronger to me is -- this gets to the operating machine of the company. This really gets into the how do we operate in a way that we are leaner, that we're more agile, that we're more focused, that we're more -- we're operating with more precision? So it's how do we get our supply chain, our go-to-market, our insights, our marketing to be much more precise, agile? And that is a journey that, if we do it right, I'm sure we'll do it right, will give us the sustainability of the accelerated model. So that -- this is what keeps the model sustaining itself and allowing for us to become more competitive every day versus our competitors in the marketplace.

There are 3 things that we put here. One is elevating cost to a much more strategic role in the company. So we want to make sure that cost and cost management and cost transformation get a lot of management time. And we have -- as I show you, we have a playbook. We have some very clear principles. And we're going to transform holistically our cost structure on an ongoing basis, adopting technology, adopting data in a way that allows us to execute with more efficiency, at the same time, be more effective.

Then we're going to be very intentional on where we invest those savings. There are a few things that will make us really perform much better in the marketplace, and those are the capabilities we really want to be best in class. And they will give us the superior performance. I'll talk to you about it. These are capabilities in the areas of consumer, customer and an end-to-end supply chain, which is going to be a big accelerator.

And the third point is all this will not happen if we don't have the right talent, a differentiated culture that is focused on high performance and an organization that allows us to be very locally relevant, winning every geography, but at the same time, be connected as a company in what could make a difference globally. So let me unfold that a bit better.

In terms of cost. We're going to work on 4 areas -- 4 big areas of cost. Obviously, redesigning work so that we create better jobs, and at the same time, reduce labor costs, right. So we're seeing that some of our positions, our jobs, our current jobs, will not be sustainable in the future. People don't want to do them anymore. We need to rethink them. So we're rethinking the way we operate in our warehouses, some of our sell-in, even some of our back-office roles, we need to really side them with technology in a way that will create better jobs for our employees. And in that, there will be a lot of, I think, efficiency, and then we'll do the work in a better way. Obviously, reducing nonlabor cost. Increasing the ROI of the commercial